HEICO Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019, compared with the three months ended January 31, 2018, unless otherwise noted. HEICO operates through its Flight Support Group (FSG) and Electronic Technologies Group (ETG). Amounts below are in U.S. dollars; financial figures are in millions except per-share data.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Net sales | $466.1 | $404.4 | Up 15% |
| Operating income | $97.9 | $79.6 | Up 23% |
| Net income attributable to HEICO | $79.3 | $65.2 | Up 22%; record quarter |
| Diluted EPS | $0.58 | $0.48 | Up 21%; share figures reflect the 2018 5-for-4 split |
| Gross margin | 39.1% | 38.3% | Up 0.8 percentage points |
| Operating margin | 21.0% | 19.7% | Up 1.3 percentage points |
| Net margin attributable to HEICO | 17.0% | 16.1% | Up 0.9 percentage points |
| Operating cash flow | $49.6 | $51.9 | Down $2.3 |
| Capital expenditures | $5.9 | $7.6 | Quarterly spending |
Business performance and material changes
- FSG sales increased 13% to $287.2 million, principally from 13% organic growth, stronger aftermarket replacement parts demand and specialty products growth. FSG operating income rose 15% to $52.9 million.
- ETG sales increased 18% to $184.4 million, including 12% organic growth and $10.8 million from fiscal 2019 and 2018 acquisitions. Management cited stronger defense, aerospace and space demand. ETG operating income rose 19% to $51.6 million.
- Management attributed improved consolidated gross margin primarily to favorable FSG specialty-products mix. SG&A rose to $84.3 million, but declined as a share of sales to 18.1% from 18.6%. Higher contingent-consideration estimates, acquisitions and performance-based compensation contributed to the expense increase.
- Interest expense increased to $5.5 million from $4.7 million, principally reflecting higher interest rates. The effective tax rate was 4.5%, versus 4.7%; both periods included discrete tax benefits. The fiscal 2019 tax benefit from stock-option exercises was $14.4 million greater than in the prior-year quarter.
Cash, debt and liquidity
- Cash and cash equivalents were $57.9 million at January 31, 2019, down from $59.6 million at October 31, 2018. Current assets were $779.4 million and current liabilities $224.1 million.
- Total debt was $608.5 million, including $599.0 million borrowed under the revolving credit facility, versus $532.5 million at October 31, 2018. The revolver weighted-average rate was 3.6%; borrowings mature in fiscal 2023. HEICO reported compliance with facility covenants and a total-debt-to-shareholders’-equity ratio of 38.0%.
- Operating cash flow was affected by a $78.0 million working-capital increase, including inventory growth and payments of prior-year accrued compensation and payables. Investing cash outflow was $115.6 million, principally for $101.0 million of acquisitions. Financing provided $63.6 million, including $93.0 million of revolver borrowings and $17.0 million of repayments.
- Management expects operating cash flow and available revolver capacity to fund requirements for at least the next 12 months. Fiscal 2019 capital expenditures are estimated at approximately $43 million.
Outlook, accounting changes and other items
- Management raised fiscal 2019 growth estimates to 9%–11% for net sales and 11%–13% for net income, from prior estimates of 8%–10% and approximately 10%, respectively. It expects growth in FSG commercial aviation and defense and across most ETG products, while continuing product development and acquisitions.
- Fiscal 2019 acquisitions included a greater-than-50% interest in Freebird Semiconductor, 92.7% of Apex Microtechnology and all of Specialty Silicone Products. Their reported-quarter sales and earnings were described as not material. February 2019 acquisitions of Solid Sealing Technology and Decavo were also reported as not material or significant.
- HEICO adopted ASC 606 using the modified retrospective method on November 1, 2018. It changed the timing of revenue recognition for certain production and repair contracts; the effect on Q1 FY2019 operating results was not material. Prior-year comparisons were not restated. The adoption increased opening retained earnings by $13.4 million; reported contract assets were $47.1 million at quarter-end.
- Redeemable noncontrolling interests were $139.0 million. Certain holders have put rights that could require cash purchases of their interests through fiscal 2026; Apex’s noncontrolling holders have put rights beginning in fiscal 2023 or earlier under specified conditions.
- Standby letters of credit totaled $4.3 million. Management said pending litigation in the ordinary course is not expected to have a material adverse effect. The filing identifies risks including aviation demand, defense spending, competition, product development and manufacturing, acquisitions, customer credit, and interest, foreign-exchange and tax rates.
Important facts for investors to verify
- Whether the raised full-year growth outlook is supported by sustained organic demand and segment margins.
- Whether working-capital use, particularly inventory growth and payment timing, moderates and converts earnings into cash.
- Acquisition integration, purchase-price allocations, future contingent consideration and the effect of higher debt and interest costs.
- The sustainability of unusually low effective tax rates given the disclosed discrete tax benefits.
- How ASC 606 contract mix affects reported revenue, contract assets and period-to-period comparability.